AU Small Finance Bank Ltd (NSE: AUBANK) Q1 2026 Earnings Call dated Jul. 19, 2025
Corporate Participants:
Prince Tiwari — Head, Investor Relations
Gaurav Jain — President Finance and Strategy
Vivek Tripathi — Chief Credit Officer
Sanjay Agarwal — Managing Director and Chief Executive Officer
Analysts:
Renish Bhuva — Analyst
Suraj Das — Analyst
Kunal Shah — Analyst
Ashlesh Sonje — Analyst
Param Subramanian — Analyst
Nitin Aggarwal — Analyst
Pritesh Bumb — Analyst
Bhavik Shah — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to the AU Small Finance Bank Q1 FY ’26 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal an operator by pressing star and then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr Prince Tiwari, Head of Investor Relations. Thank you, and over to you, Mr Tiwari.
Prince Tiwari — Head, Investor Relations
Thank you, Dravin, and good evening, everyone, and welcome to AU Small Finance Bank’s earnings call for the first-quarter of financial year FY ’25 ’26. We thank you all for joining today evening. And I do understand that probably for most of you, this is a very long day. So thank you once again for joining the call. On today’s call, we have our Founder, MD and CEO, Mr Sanjay Agrawal.
We have our Executive Director and Deputy CEO, Mr. We have our CFO, Mr Vival Jain, CRO, Mr Deepak Jain; and Chief Tread Officer, Mr Vivek along with Gaurav — Vivek — Gaurav Jain, President, Finance and Strategy and the IR team. Like previously similar to last quarter, we’ll start the call with 15 to 20 minutes of opening remarks by Gaurav, followed by a Q&A session of 40 to 45 minutes.
For the benefit of all participants, we kindly request all the participants to kindly restrict to two questions per participant and join back-in the queue should you need to ask further questions. For all data keeping questions, you can always reach-out to IR team at any point in time after the call. So with that, I now request Gaurav Jain, our President, Finance and Strategy to share his opening remarks. Gaurav, over to you.
Gaurav Jain — President Finance and Strategy
Thank you, Prince. Good evening, everyone, and thank you for bearing with us on a Saturday evening. Let me begin with a quick look at the operating environment. Q1 was a seasonally muted quarter with subdued macro and weak underlying demand. System-level credit growth continued to decline and was 9.5% in June versus 16% in FY ’24.
On-the-ground operating environment also remains fixed, although we could see improvement as the quarter progressed in May and June. On the plus side, policy rate cuts, liquidity infusion and announced CRR cut have provided support on the deposit side. We expect the broader economic environment to improve in the second-half of the year, supported by a rural demand, revival in urban demand, uptick in investment activity and government’s continuous thrust on capex.
In this evolving environment, AU continued to deliver robust performance. We delivered strong growth with our deposit book growing by 31% Y-o-Y, which was nearly 3x of the system growth rate. And our loans book grew by 18% Y-o-Y, which is nearly 2x of the system growth rate. Notably, this growth was delivered despite de-growth of 23% in our unsecured book.
PAT grew by 16% Y-o-Y and we delivered an ROA of 1.5% despite margin pressure and elevated credit cost in unsecured assets. Now let me give some color on our businesses. First, on the deposit business, our deposit base crossed INR1,27,000 crores, growing by 31% year-on-year. Current account balances grew by 34% Y-o-Y and savings account grew by 13% Y-o-Y, taking the total CASA growth to 16% Y-o-Y. All other key parameters remain in-line.
Our cost of funds improved by 6 bps to 7.08% from 7.14% in Q4. We maintained an average LCR of 123% during the quarter, which was an increase of 7% from last quarter. And our CD ratio excluding refinance stands at 79%. Our branch profitability improved with 49% of our branches, which were in existence in December ’23, becoming profitable in Q1 versus 34% a year back. During the quarter, we undertook pricing cuts on SAR and FT in-line with the easing rate cycle and our comfortable liquidity position.
Rate was reduced by 50 bps with up to 100 bps reduction in certain buckets as compared to March ’25 and peak equity rates were reduced by 90 bps to 7.1%. In, we continue to prioritize our strategy of driving granular retail deposit growth through focused customer acquisition, tailored product offerings, enhanced customer engagement and improved sales productivity. We have a full product suite with cutting-edge digital channels catering to diverse needs of our deposit customers.
These include various segmented savings and current accounts offering, insurance and wealth solutions, credit cards, unsecured loans and FX. Our well-structured distribution channels are scaling efficiently, enabling us to deepen customer relationships and expand our deposit base sustainably. This year, we will add around 70 to 80 new deposit branches, mostly in the top cities.
Our team is well-poised to drive the next phase of growth backed by deep domain expertise, strong execution capabilities and alignment with strategic priorities. Now moving on to our asset franchise. Our loan portfolio grew by 18% year-on-year to reach INR1,17,000 crores. Growth was led by our core secured segments, which include retail secured assets and commercial banking assets. These two portfolios form 88% of our total loan book and grew by 22% year-on-year.
Our retail secured assets book, which stands at around INR79,000 crores and forms 67% of our total loan portfolio includes wheels, mortgages and gold loans. This is our flagship business with a legacy spanning over two decades and is a distinctive blend of scale, growth, high-yield and robust asset quality, making it the cornerstone of our asset strategies. This segment continues to deliver strong performance with growth of 20% Y-o-Y and 3% quarter-on-quarter.
Now let me talk about the key products within retail secure. First is wheels. Our wheels book is around INR38,000 crores, which is 32% of our total GLP. The book is largely fixed-rate and is well-diversified across new and used personal and commercial cars, SCVs, LCVs, tractors and two-wheelers. Wheel segment has continued to deliver strong and consistent growth. GLP grew by 26% year-on-year, which is market-leading in our segments. Portfolio yield increased by three bps quarter-on-quarter and is north of 14%. We are significantly expanding the distribution and wheel segment, leveraging erstwhile Fincare branches in UP and South. Wheels distribution increased from 550 branches in March ’24 to 715 branches in March ’25, with another 200 plus branches set to go-live in FY ’26. This implies an increase of 70% from March ’24. We expect the growth to remain strong for the full-year with multiple growth levers, including diversified book, strong used vehicles contribution and ongoing distribution expansion. Credit cost remains broadly in-line with our expectations in a seasonally weaker Q1. Segments which are showing stress in the overall industry, for example, used SCV and SCV are relatively small proportion of our book. We do not see any cause for concern and expect asset quality in these segments to normalize in the second-half as per trend. ROA for the segment remains strong and is consistently above 2%. In addition, the portfolio contributes meaningfully to our PSL and SMF obligations. The second key product is mortgages, which stands at around INR39,000 crores and forms 33% of the total GLP. It includes loans and home loans. Total mortgages portfolio grew by 14% year-on-year and 1% quarter-on-quarter. Within this, MBL and home loans respectively grew by 15% and 11% Y-o-Y. More than 70% of MDL book is fixed-rate and ROA for the book is greater than 2.5%. There is no comparable peer operating at this scale and yield in MBL. We are working to increase the growth rate of this book to over 20% by next year. Similar to wheels, we are increasing our distribution. MBL branch count increased from 532 in March ’24 to 924 branches in March ’25, including merger. We are planning to increase this by another 200 plus branches in FY ’26. However, competitive intensity remains high in this segment and there could be potential downside risk to our growth target. Credit cost is slightly above our expectations, primarily driven by deterioration in our Southern book, which is around 15% of the total book. However, this book — South book is also higher-yielding at around 17% to 18% versus 14% for the rest of the book. We have taken further measures to strengthen the collection and security enforcement infrastructure and expect normalization by the end of year for the Southern mortgages. The third product within retail secured assets is gold, which has GLPO of around INR2,000 crores and comprises 2% of the total loan portfolio. Gold loan portfolio grew by 11% year-on-year and 4% quarter-on-quarter. There is no-risk weight for gold loans. Portfolio yields around 16% and ROE is north of 3%. RBI’s unified guidelines for gold loans have harmonized norms across banks and NBFC. Allowing banks to compete more effectively. We remain compliant with the guidelines and believe there is an opportunity to build and scale our gold franchise significantly, leveraging the capability acquired through the Fincare acquisition. Distribution network has increased from 350 branches in March ’24 to 850 branches in March ’25 post-merger. We are further investing in scaling the sales and operations team and experimenting with branch formats to increase disbursement tax. The second key asset segment is commercial banking, which is 21% of the total loan portfolio and includes five businesses, business banking,, emerging enterprises and financial institutions, real-estate and transaction banking. We have a full product suite and tech capability, including the AD1 business, which we started last year. We established a good track-record over the years with strong growth, stable asset quality and consistent ROA of about 2%. Total GLP grew 30% year-on-year and 2% quarter-on-quarter and we expect full-year growth to remain strong as per expectation. Asset quality also remains in-line with expectations. So-far, we have discussed the secured asset portfolio. Now let me walk you through the unsecured segments, which degrew by 23% year-on-year and 7% quarter-on-quarter and form 8% of our total loan portfolio. The largest unsecured segment is the inclusive finance book for bottom of pyramid customers, which includes MFI and lending to small marginal farmers and SPOs. This book is key for fulfilling our PSL obligations in SMS and Agri and contributed more than half of our SMF requirements in FY ’25. Total book is around INR6,500 crores, which is around 6% of our total GLP. MFI is the biggest product in this segment with bank having comprehensive microbanking relationships with customers, including savings account, insurance, payment solutions and DVT linkages. MFI has GLP of INR6,200 crores and is facing twin challenges of asset quality and book degrowth in the current credit cycle. The book degrew by 22% year-on-year and 7% quarter-on-quarter. We expect the book to have bottomed-out this quarter, achieved stability in Q2 and grow thereafter. We are targeting INR7,000 crore book by year-end, implying a year-on-year growth of 5%. On asset quality, the performance was also below our expectations. Collection efficiency for the quarter dropped to 98.3% versus 98.7% in Q4, driven by seasonality, state ordinance in Karnataka as well as impact from guardrails coming into effect. This has pushed back the expected recovery by quarter and we now expect full-year credit cost to be higher at around 5% versus our previous expectations of 3% to 4%. We have taken a number of operational steps to strengthen the business, including increasing the collection scheme and securing cover under the CGFMU credit guarantee scheme. Incrementally, 97% of Q1 disbursements are covered under CGFMU, taking that portfolio coverage to over 50% by end of Q1. We are observing asset quality improvements sequentially after guardrail implementation and will continue to update as things evolve. The other unsecured book is our credit card and personal loans business. Total GLP is around INR3,000 crores, which is 3% of the total loan portfolio. Of this, credit card book is around INR2,300 crores, which saw a degrowth of 27% year-on-year and 6% quarter-on-quarter. Credit cost remains elevated in-line with our expectations and may have peaked this quarter in absolute terms. Most of the flows have come from the — from the identified pools where we have already taken actions to reduce credit limits. Credit costs may remain elevated in Q2, but we expect it to start normalizing from second-half onwards. Now in terms of profitability, we delivered profit-after-tax of INR581 crores for the year, up from — up by 16% in Q1 last year. ROA for the quarter was 1.5% despite margin pressure and elevated credit costs in unsecured book. Our net interest margin declined by 38 bps in the quarter from 5.8% in Q4 to 5.4% in Q1. This decline was due to the following key drivers. The first is reduction in asset yield by 27 bps from 14.4% in Q4 to 14.1% in Q1. This was due to repo cut impact on variable book, lower asset yield primarily in credit card and change in asset mix with lower MFI. The second reason was reduction in investment yield by around 20 to 25 bps in Q1. This drop was driven by lower rate environment and booking or treasury gains. Third was due to effect of higher liquidity, including investments in mutual funds carried during the quarter, which had an impact of around 10 bps on NIM. This is expected to reverse as the year progresses. These yield declines were partially offset by a decline of 6 basis-points in cost of funds from 7.14% in Q4 to 7.08% in Q1. Going-forward, whilst there will be further impact on asset yield in Q2 from repricing of the variable book, this would be partially offset by lower-cost of funds and reversal of higher liquidity as the year progresses. Q2 should be the bottom for NIM and we should start seeing gradual improvements in margins from Q3 onwards, assuming no further rate cuts. Other income saw a healthy contribution driven by treasury gains and ongoing strength in core fee income. We also maintained disciplined cost-control over operating expenses. OpEx by total assets fell from 4.2% in Q4 to 3.9% in Q1, partly driven by lower disbursement in the quarter. Cost-income ratio was 54%, which benefited from higher treasury gains in the quarter. Our credit costs remained elevated in Q1, driven primarily by unsecured segments as elaborated earlier. Overall, basis the Q1 performance in MFI and our South-based mortgages portfolio, there is a downside risk to our previous guidance and we increased our full-year credit cost expectation by-10 to 15 bps, taking the expected credit cost to around 1% of average total assets. To sum-up, Q1 was a quarter of steady execution in a transitioning macro-environment. We remain confident in our strategy, our customer-centric model and our ability to deliver consistent performance. With that, I’ll now hand over to Prince for Q&A. Thank you.
Prince Tiwari — Head, Investor Relations
Thank you, Varav. Dorwin, we can now open the floor for questions.
Questions and Answers:
Operator
Certainly, sir. Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to please use handset while asking a question and to limit yourselves to two questions per person. You may rejoin the queue if you have further questions.
Ladies and gentlemen, we will now wait for a moment while the question queue assembles. The first question comes from the line of Renish from ICICI. Please go-ahead.
Renish Bhuva
Yeah, hi, sir. Just two things from my side. One on the overall profitability from 26% perspective. So we have increased our credit cost guidance and when we look at NIM reduction in Q1 and also we see now financing that it will further go down in Q2 and then the bottom out. So how do you expect ROA settling in ’26 and so ’27 considering pressure on NIM and hurricane costs in ’26,
Gaurav Jain
We haven’t guided for an ROA for FY ’26 and we reiterate our guidance of achieving 1.8% ROA for FY ’27.
Renish Bhuva
So we’ll stick to our guidance for ’27, right?
Gaurav Jain
Yeah.
Renish Bhuva
Okay. And secondly on the vehicle financing piece, so you did mention about some stress in UCV or CV segment. But can you please elaborate further? I mean, is it specific or it is a broad-based largely due to the weak macros?
Vivek Tripathi
Yeah, hi, this is Vivek. See, yeah. One, first of all, that you see — used SEV book and use SEV book is very, very small proportion of our total assets, about 6% of the total yield asset is in that segment. And there was a — the trend did not start this year. The trend started last year across the industry when because of the delayed carbon capex, there was a heavy rain last year.
So the pressure started building up in that segment. And we took a lot of character measures in Q3, Q4 of last financial year and the book is performing very well post that, right? So there is a very, very little impact. It’s not geographically specific, it’s just specific to one segment, which is used small commercial vehicle and anyway, we don’t have much of presence in HCV. So we are not there in that segment, so nothing to comment about that.
Sanjay Agarwal
So Renesh, hi, I’m Sanjay Awal side. So just to add-on with about Gaurav’s comment that this year too, of course, we all believe that act — the quarter two NIM will go down, but there is all probability that quarter three, quarter-four NIM will be more expanded, right? And in terms of our credit cost, because we guided around 85 90 bps.
So because of this 1/4 going up for MFI, we believe that 90 bps might not be achievable. So we are just calling out so that the people can figure out in your calculation that can be 100 bps. But one thing is sure that this year will remain stronger than the last year. So last year we performed around 1.4, right, in terms of our ROA.
And next year we are already at 1.8. So this year, of course, it has to be on a — on an upward trend, but difficult as of now because, again, not many variables in the environment, how the Indian economy will happen, what there may be more rate cut, you know. And of course, the — we haven’t guided an absolute amount in terms of growth.
We are relativeness there. So if we are growing at 6.5% and then the inflation is around 3%, 3.5%, then overall nominal GDP is around 9% and then we can’t grow in the range of 25%, right? So I think it has such a variable, but next year, why we are sure because it will be a sizable balance sheet and the entire the NIM pressure will go away.
We have a 70% book is fixed, you know, right. So we are more sure about next year and not much correction will happen in MFI in the credit card too. So I think again the — I’m retreating this line from now three, four years that banking franchise require at least 10 years to get stable, stronger and scalable, right? So we are on that path.
Renish Bhuva
Got it. And just any follow-up on that. So some of the stress in this segment, which you did mention about sound-based, CV, NC, et-cetera. Is this because of the excessing growth in this segment by industry or there is nothing too much story into this
Vivek Tripathi
Answered. Yeah. So Nish, the South-based mortgage was fundamentally different from our — you know, what we used to do in North and West. It was a very-high yielding book at 18%, 18.5%. The ticket size was smaller. Obviously, so the inherent customer profile and inherent risk was also different, but the reward was also different.
And we had already taken. It’s not that now we have taken — we had already taken measures in terms of building that collection infra, you know, having that the complete setup in terms of doing the and legal recovery, right, which would yield results now because it was under different setup. Fundamentally, we had this recipe to run this business in. So we replicated across the geography. We would see results in couple of quarters, right?
Renish Bhuva
No, but not fundamentally very different. So I mean, fundamentally, just
Operator
Want to interrupt Renesh. We request you to please rejoin the queue for further questions.
Renish Bhuva
Okay. Thank you.
Operator
Thank you. Participants, we request you to please limit yourselves to two questions per participant. You may rejoin the queue for follow-up questions. Our next question comes from the line of Suraj Das from Sundaram Mutual Fund. Please go-ahead,
Suraj Das
Hi. Thanks for the opportunity. One question I mean on this credit cost again. On this unsecured NFI credit card personal loan, I can understand. But, again structurally, if I see for last seven, eight years, your secured retail credit cost has always been 17 basis-points or lower barring the COVID year let us say since FY ’20 — FY ’18. But for last three, four, five quarters, it is only running up and high. And now probably deep guidance.
So I mean, question is structurally what has changed? I mean, in the pace of growth, I mean have you structurally losing some risk filter or have done something like that? And would it be fair to assume that probably that 60 to 70 basis-points cost in the secured retail is not possible anymore, probably if you are growing at 20% plus, more or less 100 basis-point credit cost is the new normal. So that is my only question.
Sanjay Agarwal
No, no, I appreciate your question. So I think two things. One, I would strongly advocate that these businesses go through cycles, right? And unfortunately, couple of years, you know, the kind of market segment we deal in, there is some pressures in those markets because is now doing well. We have also become pan-India franchise, team needs some time to settle down.
So it’s mix of all things. So — but I completely agree that we remain as one of the strongest franchise in terms of collection and asset quality in this segment. But I don’t think now because of our size, scale and the kind of footprint we have now, because that time we were very too small, things can be managed more macro-level, right?
But now at this size scale with the pan-India presence and with this kind of economic trends, you know, we should expect the little bit elevated credit cost, which may be in the range of 75% 80. But last year we thought that this year we might be at 85% 90. But in security asset, you will see not much improvement maybe next year onwards, not this year in that range.
But because FFI is on higher-rate, the credit cost is in the Middle of whole — the work-in progress. So I think that is why we are around 1% kind of credit cost. But I believe that in the given circumstances, the is performing very well.
Vivek Tripathi
In addition to what Sanjit said there was a complete change in the — even the presenting norms also. If you’re comparing the ’17, ’18, ’19, obviously the PCR on the secured asset was different, right, because we had a very historical data of the net credit-loss. But on a bank platform, obviously, the provisioning norms changes and we had to change accordingly. So those are not actually apple-to-apple comparable. A little — if you adjust for it, there is a little gap, yeah, but not that right.
Suraj Das
Yes. But in terms of underwriting, I mean, nothing has changed over a period of time.
Sanjay Agarwal
But rather, I would say we have become more stringent like previous days, it was more about NBFC kind of culture. Now we have actually adopted the global arms lab kind of working where sales don’t have credit powers, credit guys don’t have a sales target or anything. So rather we are working on our credit team and Vivek the participating on this call has been elevated to Chief Credit Officer to have a credit culture in the bank for the scale — for the scale sustainability.
Suraj Das
Got it. All the best, sir for the future quarters.
Operator
Thank you. Thank you. Our next question comes from the line of Kunal Shah from Citigroup. Please go-ahead. Kunal, your line has been unmuted. You may proceed with your question.
Kunal Shah
Yeah, thanks for taking the question. So firstly, maybe what changed post maybe the commentary in the last earnings call? Maybe wasn’t it very visible with respect to the stress in MFI or were there any incremental stress pockets which came in after the last earnings call? And even this entire stress on the Southern book, okay, maybe how big was that element in the overall slippage and the credit cost? And what actually led to that because generally like mortgages tend to behave quite well. So you indicated a bit, but maybe is it maybe what happened between maybe the earnings call of last quarter and maybe the results for this period, yeah.
Vivek Tripathi
Yeah. So Kunal, Vivek here. One, we had a — the collection efficiencies in non-OD in microfinance were trending upward of 19.7% by March and yeah, 98.7% in March. And there was some anticipation that this would sustain in Q1. It did not happen. It’s not that it’s with us, the industry-wide. Those collection fees could not hold, but there is a green shoot. If you look at from April, May, June and July, it’s looking upward again. So it just pushed by 1/4, one.
So point two, further on that portfolio, what we ensured that incremental disbursement are happening with the government guarantee, which is. So in Q1, whatever we did, it’s 97% is covered by those guarantees. So we would have a cap in terms of the credit cost anyway, right? On the mortgage, Southern mortgage piece, as I said that it is fundamentally it was very granular book with differentiated yield, it was at 18.5%.
There was a transition of team. Obviously, some amount of churn happens when you transition, that would have led to some elevation in terms of the, I would say, a decline in collection efficiency and plus, you know, this was not a very old business with. So in terms of the learning and building the infraft collection and legal recovery has been done by us now.
So we are very, very confident that we will be going to pull it back-in just couple of quarters because it’s not that there is no security, there is no customer. So everything is there, just the collection infra was not that strong. The legal mechanism to enforce the securities to do 134, 132, the infra was not there, which we already build-up now.
Sanjay Agarwal
So Kunal, as Sanjay decided, so, if you — because we are talking more granular in terms of MFI or in terms of other markets about NBL, right. But overall, we strongly believe again that we were expecting around 85 bps or 90 bps on total asset credit cost that we are just saying that it may go up by-10 bps.
And the reasons are like this, right, which is MFI and maybe some market. Otherwise, we believe that H2 will be very strong in terms of recoveries because not much, I would say the data phase obtain says that July onwards, things will look better. That’s the way I want to sum-up about our credit card — credit cost estimation.
Kunal Shah
Yeah. And after this experience on credit card, this sudden-based mortgages which would again be like AU specific, do you see any other geographies of pockets wherein we need to slightly strengthen the filters, maybe augment the collection capabilities. Would that be the case maybe like reevaluating the portfolio do we require to do in any of the geographies or in the portfolio?
Sanjay Agarwal
Not really, Kunal, not really to be honest, not really. And these are also very specifically called out because we took over Fincare from last year itself and it requires some effort and of course, you need to give some time to the previous leadership and of course, when we took over from every thing with our perspective, it requires some more time to really implement all those things. So it’s very natural.
But you know that in this acquisition, we got the southern markets for RVs business, MBL, HL. So lot much growth will also happen from these markets in times to come, right? It’s a temporary kind of challenge. And as Divek told you that we have the recipe to solve all those challenges we have done in past in North and maybe in West markets. So not largely in terms of — we are not telling you that the large issues, but because the numbers are so because going from 90 bps to 100 bps, we thought that let the market know that where we are really working, right? Yeah.
Kunal Shah
And fair to sir, this was asked portfolio.
Operator
We request you to please rejoin the queue if you have follow-up questions. Thank you. Our next question is from the line of Ashlesh Sonia from Kotak Securities. Please go-ahead.
Ashlesh Sonje
Hi, team. Good evening. Sir, first question is on your — on your loan growth outlook for FY ’26. Now that seeing some signs of stress in some of these segments, how do you think about your outlook for growth in ’26?
Prince Tiwari
So hij, here. So at least, I think in the last call, we had guided that we want to peg our growth given the size to the economic activity in the country. And we had said that we look-forward to grow anywhere between 2 to 2.5 times of nominal GTP, right? Some of the stress was expected. I think when we did that call, we very clearly articulated that stress on the unsecured side would take a couple of quarters to resolve itself before it kind of picks up the growth pace, right?
And that was factored in. I don’t think fundamentally anything changes there. We will still target anything between two to 2.5 times of our normalized GDP growth. Even on this quarter on a year-on-year basis, we have grown by 18% and Q1 is a seasonally weak quarter. So I think growth will pick-up.
Most of the impediments to the growth, at least at the economic level as well in terms of the liquidity, the entire inflation, the CRR cuts have been announced. So some of those things have reversed, right? So hopefully, I think at this point, we can only hope that the economic activity picks up across the country and the growth goes through.
But from our perspective, we are very, very clear that the heavy-lifting of the growth from our side will be done by vehicle financing, will be done by — which is commercial banking and gold loans. All of these portfolios can grow anywhere between 20% 25%, you know, that’s the target that we are doing. Like vehicles this quarter as well has grown 26% Y-o-Y, right? So as far as mortgages are concerned, which is the other bigger portfolio.
You know that we have been growing at about 15% for last three years on a CAGR basis, primarily a lot of competition there. And we have now added to put up a lot of distribution there as we have articulated earlier as well, given the entire franchise that has become available from the South, there were certain gaps, which Vivek articulated that we have already fulfilled and we are pretty confident that we’ll be able to grow that business.
I think immediate target on the mortgages side is to take that business from 15% to 17% 18% growth this year and maybe 20% plus in the subsequent years, right? So I think we are there — it’s a function of how much economy supports Supports. I think the only surprise to earlier question as well from — and that’s a more market-wide surprise has been the microfinance because our view was that probably it should start growing a bit. But again, it has degrown by 6% this quarter as well. But given the entire actions that we have taken, some of the credit filters that we have relooked at the risk filters, we do think that this is the bottom. And even in the microfinance business, I think from this quarter, you should see stabilization and maybe some sort of a growth from — as Gaurav articulated in his opening comments, that about 5% kind of growth that we are expecting for this financial year.,
Ashlesh Sonje
Thanks, thanks for the elaborate response. Second one is on the credit card book. I see that there is still about INR700 crore INR720 crores, which is sitting in the revolver portfolio. Have you — do you have a sense of how much of the overall book or out of this revolver book can eventually flow into NPA or have to be written-off? That is one. And related to it, I see that you have restated the share of revolver in the credit card receivables for the March ’25 quarter from 38% to 35%. So can you explain that one, please?
Gaurav Jain
Yeah. So I think the last year, you know the 37% that you saw that was a mistake, right? So that was just a mistake that got carried. So the correct number for March ’25 is 35%, right? And we had uploaded a revised the presentation on that as well. For the rest, I’ll hand it over to.
Vivek Tripathi
Yeah. So in terms of whatever stress we see in this book, the majority of that puts coming from our identified pool, right, where we did some limit decrease function, right? And that pool is reducing every month. And we’ve already indicated, as Gaurav also mentioned in the call that we — in absolute term, I don’t guide in terms of the percentage, but in absolute term, the credit cost has peaked, it would start coming down from this month this quarter onwards and we would see substantial decrease, right?
So we know that what pool is performing and plus on the new acquisition side, we have taken a lot of initiatives, which obviously is everything takes its own times can use scorecard, we’re coming with new platform to host those core cards with new LOS and that scorecard for ETV, NTV for and for behavioral this thing, some of it’s already started, the work has already started. It takes a couple of months-to implement and then the degrowth on the book probably will tie to a rest in maybe Q3 onward, right?
Ashlesh Sonje
Understood. And if I could just squeeze in the last one. This mortgages book slippages that you are seeing in the South portfolio, roughly what proportion of the book do you think is exposed here?
Vivek Tripathi
We have 15% book in-market. I think Gaurav has already articulated and it’s only a — it’s not that the difference is that large. We just — we just tried to explain that on the retail secured side from where this slippages has come. So we thought let’s call-out which segment. It is just a sub-segment of the entire book, which is very, very minuscule, right?
Sanjay Agarwal
That is on high.
Vivek Tripathi
Yeah, it’s very-high.
Ashlesh Sonje
Understood, sir. Thank you.
Operator
Thank you. Thank you. Our next question comes from the line of Param Subramanian from Investec. Please go-ahead.
Param Subramanian
Yes, hi, thanks for taking my question. First question is on opex growth. So it’s a 4% Y-o-Y, it is really a smaller franchise that is growing, right? So what explains that and other operating expenses, I think, down on a Y-o-Y basis. So what is happening there?
Prince Tiwari
Param, other opex is down on the Y-o-Y. So Param, princi, right? So you know, as we have — if you look at on our last full-year commentary, you know, as we have articulated in multiple calls, there was a lot of internal focus around productivity and efficiency gains, right? And we have — we also cut-down a lot of cost expenses, rationalized a lot of expenses around our entire digital marketing. The entire marketing above-the-line marketing and branding was not really taken.
Also the fact that the credit card issuances have kind of slowed down. So that also led to some savings. So it has been a very focused and disciplined effort by the entire team for last full-year in terms of trying to control the other opex. As far as band is concerned, overall opex has grown by 10% Y-o-Y and we have added people, right? We are adding people wherever it is necessary, but you’ll also understand that the franchise has come to a certain scale.
There is also some amount of synergy, which came from the merger, right, in terms of people opex. So all of that has led to a very disciplined execution on the overall opex front from our side.
Param Subramanian
Got it thanks. How to think about opex growth going ahead, cost-to-income, cost of assets any other way?
Prince Tiwari
So it’s difficult to call-out because again, the businesses will pick-up. Like Q1 is typically a seasonally slower quarter. So as we move further during the year and if the economic picks up, we do want to grow. We have growth aspirations. We have talked about it earlier, right? So I would like to say or leave it at that, that overall, you will see some amount of efficiency on a year-on-year basis that we are trying to achieve. I don’t want to put a number to it.
Gaurav Jain
And also just to add, right, the previous guidance that we had given on cost-income ratio is that is for that number to stay below 60%, right? And last year, I think we ended at around 57% or so. So I think our endeavor is to stay below 60% on a cost-to-income basis. And on a cost to opex basis, as Prince mentioned, the target would be to do better than last year, which was I think 2.3% or something.
Param Subramanian
Okay. Very helpful, Gaurav and Prince. So on your slide 11, right, so you are calling out the credit cost across segments, which is very helpful. But so you’re showing the retail secured is at 1.2% annualized. So what is it as in — is the first-quarter seasonally at this level? Of course, are we seeing weak — or are we seeing more weakness than normal here?
Vivek Tripathi
It’s largely a seasonal impact and we already call-out the few sub-segments within that there were some elevated slippages in credit costs. But our franchise are strength to execute those products and ability to underwrite and understand those segments remains very-high. And this is only a seasonality, which obviously has played role in some amount of weakness within the underlying economy, right? That also you can’t take-out of the equation, right?
I think — and with the good monsoon, the good rural income, lot of things might be look-forward to improve Q2 onward, right? And the festive season as the festive season would kick-in from the end of Q2 and Q3, things anyway changes in our — our customer segment is.
Sanjay Agarwal
And in my opinion, the quarter one growth and quarter one credit cost cannot be.
Param Subramanian
Right. Got it. Got it, sir, sir. So would it be fair enough
Operator
Sorry to interrupt. We request you to please rejoin the queue if you have further questions.
Param Subramanian
One last question only.
Sanjay Agarwal
Yeah. Yeah, okay, okay,.
Param Subramanian
Okay. Okay. Thank you so much. So would it be fair to say this increase in credit cost is purely what we are seeing on the unsecured side, right? This is nothing to do with the.
Sanjay Agarwal
And that we were very — we were knowing about in last quarter’s call that quarter one, quarter two will remain elevated. And as Vivek told you that in absolute amount that the credit cost — the credit card cost is already peaked and we are saying that MFI also, we believe that quarter two, it will be the — it should be the quarter where the credit cost will be peaked. And other than that, everything remains absolutely in shape.
Param Subramanian
Thank you. Okay. Okay. Thank you so much. Thank you so much, sir. All the best to the team. Thank you.
Prince Tiwari
Thanks,. Thank you.
Operator
Thank you. Thank you. Our next question comes from the line of Nitin Agarwal from Motilal Oswal. Please go-ahead.
Nitin Aggarwal
Yeah, hi. Good evening, everyone. I have couple of questions. One is around the credit card portfolio only. Like while Sanesh, you mentioned that the credit cost I speak, but as I see like the pain that this portfolio has given is like a lower than NFI, at least in this quarter and even in the prior quarter we have seen very-high credit costs. So how do you medium-term look at this business? How quickly will we want to rebound in this and what is the William term strategy on the credit card now.
Sanjay Agarwal
Yeah, hi, hi, Nitin, good evening. So I’ll just tell you as you know, you’re absolutely right that credit card cost is giving us more sales than an MFI cost. MFI business remains little profitable for this year-after this elevated credit cost or maybe de-grown of that book. But so a couple of correction has already happened. There is a leadership change there, so our product Had — Arvind has become the credit card business head. This business has again been folded with our Yogesh Jain, who is our now CEO. He is made out of Jaipur and he is the old veteran in the bank and he understands his business and he is understanding his business. So I believe that under his leadership, not much correction will happen. And already from one year itself, we have done lot many correction in terms of our acquisition, underwriting standards, collection standards, operative the matrices. So — and that is why we all believe that the quarter one already we have the — the credit cost peak in terms of absolute amount, right? So this year, let’s say, it will remain like this. The idea is to really understand with the new lenses and with the new fresh approach. And if you ask me, I will be better-off by this year end that how we are looking towards this business. As of now, the idea is to remain again to control the whole losses and come on the BP fast and then look for the growth, you know. So I would want time for my investors that they should support us in this — in this journey and give us some more time to really come and clearly say articulate our future strategy around it.
Nitin Aggarwal
Yeah, right. And the second question is around the — if you can talk about the credit environment in the vehicle business, like a few other lenders have indicated to some rise in stress in the vehicle financing business. So how are you seeing that? What kind of growth opportunities are you looking at? And then overall make some color around the environment?
Sanjay Agarwal
So Nitin, again, the meal business is the oldest business in AU and it’s now close to 30 years and it’s a well-rounded business for us in terms of diversification, pricing the risk, you know, the credit orientation, the collection orientation remains sharpest in this book. So we are not saying that we will not grow this business this year.
But if the environment is tough, we know that the sale is not happening, but because of the used financing capability that the diversification around product range, be it SCV, LCV, tractors, new cars, taxes, you know, and of course with Southern market coming up, we are opening up in East also.
So I think we are growth strategy, it will help us this year and that is why in this quarter, we have grown ourselves by 26%, you know. And the team remain very, very confident that they will achieve the target for this year too with that with the same where we don’t blown up our — blow up our asset quality numbers or anything else around it.
So we remain strong in terms of our franchise. Overall, in terms of retail assets, as we already committed, our mortgage business is in good shape, gold business is in good shape. Our MBS or our mortgage business, we are operating around 14% rate and we already crossed INR40,000 crores now.
So I think nobody in the industry has such this kind of numbers probably mortgages at this rate with this kind of asset quality. So for us, every time when we go to the market, it’s a new environment for us because of the scale, right? So that is why we are growing around 15%, but idea is to really push to this growth rate to 20% in times to come.
And again, the Southern market and the Eastern market should help us to achieve that numbers, you know, commercial banking remain absolutely in good shape. We will do our some kind of restrategize ourselves in segmenting that business. But our business banking, agri banking, NBFC, REG, again, we are looking for a growth of north of 35%. So overall, well-rounded performance and I know that environment is not that too good till now, but I don’t think that will continue and there will be some kind of pull from the markets from maybe policy onwards, you know.
But last year also we were at the same kind of feeling, but in the end, we have grown ourselves well. So barring something which is we are working progress will remain very strong in terms of our approach. But of course the market might have some kind of impact, if it’s not as per our standard or as per our expectation going-forward?
Nitin Aggarwal
Right. And lastly, Sanjee, on the margin, we have reported a sharp debt this quarter, but as 70% of our book is like, so can the recovery also be as quick from the second-half onwards?
Sanjay Agarwal
So, your impression is we shocked you, right, what in terms of NIM, what margin side? But no, we were — we were in last call that because when repo rate in, the reduction in repo rate happens, it will have a negative impact on our margins because of immediate transmission happening in our yields, you know. But I strongly believe this year, we will partially recover our margins quarter three, quarter-four, but I think the full recovery will happen next year.
Nitin Aggarwal
Okay. Sure. Thank you so much. Thanks guys, and thanks. Wish you all the best.
Prince Tiwari
And thanks again.
Operator
Thank you. Our next question comes from the line of Pritesh Bham from DAM Capital Advisors. Please go-ahead.
Pritesh Bumb
Yeah. Hi, hi, good evening, team. Just wanted to check, when we say our 1.8% ROA for ’27, have we also build or are we basically tried to build-in a cross-cycle NFI credit cost of 2.5% to 3%, which we have maintained before the cycle as well. And will we also build some on the CC business post stabilizes?
Sanjay Agarwal
Look, I think the largely you are absolutely on our assumption because by next year, our entire MFI book will be covered under credit guarantee, right. So the maximum credit cost, if the environment remain like this, I’m again repeating, if the environment remain like this where the MFI having a cost of 78% and then our credit cost should not be about 3% to 3.5%. And of course, the credit card business also by the time will be in better shape, right? And so it depends on these two variables also to achieve 1.8 kind of ROE.
Pritesh Bumb
Got it. And secondly, just on — in terms of the credit card — credit cost guidance which we gave, we increased the guidance this quarter. So does this — does this credit cost is eventually for bucket movement or fresh, fresh which can still be or which is still there in the system. So eventually, I wanted to understand if our PCR will move-up from here on.
Vivek Tripathi
So it’s a mix of both things, right? It’s a mix of always a bucket movement as well as it’s coming from the unsecured piece, right? So
Prince Tiwari
The credit cost, the collection efficiency dip that you’re seeing, Pritesh, in this particular quarter, right, we have given that chart on quarter-on-quarter how the MFI collection has dipped on the zero bucket. And what happens is that typically comes and hits you in the next particular quarter, right? So the slippages from MFI, we are expecting to go slightly higher than what we were initially envisaging, let’s say, a quarter back.
And that’s partly the reason because of this particular quarter. As that happens, obviously, we’ll have to make some provisions and that’s where the credit cost assumptions has been revised, right? But as we said, as also said that incrementally every month has been better. So May has been better than April, June has been better than May.
And so-far, whatever we have seen in July, it’s been much better than June, right? So that gives us confidence that hopefully we are nearing the end-of-the cycle and rather than further shocks. Unless something externally comes up like what happened with Tamil Nadu in, let’s say, last particular quarter or this quarter, the impact came in this quarter to some extent.
Pritesh Bumb
Got it. So just — sorry, just to harp on this a bit. How do you see your PCR shaping from here on is more or less going to be at 65 or it moves towards 7 TV attempted in-between the quarters as we go to 70 and so it has been coming down or has been slightly volatile. So where do we see that?
Gaurav Jain
So I think PCR is sort of an is a function of provisioning policy, right? So I think it will continue to be driven — driven by that. And depending on the mix of the GNTA within the asset book, right, because your secured book carries lower provision than you are unsecured, right? So depending on where the NPAs are coming from, you know, the PCR could vary.
Pritesh Bumb
Got it. Okay. Okay. Thanks so much. Thank you so much.
Operator
Thank you thank you. Our next question is from the line of Bhavik Shah from InCred Capital. Please go-ahead.
Bhavik Shah
Okay, hi. Thanks for the opportunity. Just few questions. So first, sir, have you seeing any yield action on the wheel side like incrementally have the —
Prince Tiwari
Bhavik — Bhavik, sorry, Bhavik, you’re not very audible.
Bhavik Shah
Is this better now?
Prince Tiwari
Yes, comparatively.
Bhavik Shah
Yeah. Have you seen yield cracking in the wheel segment in the fixed-rate book or given there is too much liquidity in the system and NBFCs would also be completing. Have you seen any rate actions there?
Sanjay Agarwal
So pressure on yield? Yes, yes. I think if there is an liquidity available and no-growth happening, then there would be a pressure on yield, right? So how much do we think will it sum-up by given 100 basis-points. No, no, no, not we haven’t seen as of now, I’m seeing for this year-by the end of this year, there might be some pressure on yield, right? And general, I’m saying it.
Bhavik Shah
Okay. Okay. And sir, we have 6% of the book which is floating-rate, but it is in the fixed period. So what would be the exit of this fixed-rate period like when will it exit second-half this year or maybe that —
Prince Tiwari
So this 6% is largely fixed for this financial year, right? Okay. Typically, you have a three-year period, some of the loans come in respective years, but this financial year, largely the 6% is at a fixed-rate.
Gaurav Jain
But the duration piece would be more like 18 months or 24%.
Bhavik Shah
Okay, okay. And any update on the bank license?
Sanjay Agarwal
Yeah. So again, I would say work-in progress and I believe that in this current year, the decisions have been made. I’m not sure what decision and what how? But I believe it’s already 10 months from our application. So I think in calendar year, we’ll find some kind of decision-making from regulators.
Bhavik Shah
Thanks, sir. Thank you. And congrats on on. Thank you.
Prince Tiwari
Thank you. Thanks,.
Operator
Thank you. Ladies and gentlemen, we will take that as our last question for today. I would now like to hand the conference over to Mr Prince Tiwari for closing comments.
Prince Tiwari
Thank you. Thank you,, and thank you everyone for joining the call today evening. I know there has been five or six banks results. It’s been a tiring evening for all of you. So I’ll allow everyone to go home. But if you have anything residual, do reach-out to the IR team. Happy to answer all your questions. Thank you so much.
Operator
Thank you. This brings the conference call to an end. On behalf of AU Small Finance Bank, we thank you all for joining us. You may now disconnect your lines